<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
COMMISSION FILE NUMBER 0-24276
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0604264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
----------------
3636 NOBEL DRIVE
SUITE 200
SAN DIEGO, CA 92122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(619) 453-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR, IF CHANGED SINCE LAST REPORT)
----------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:
[X] YES [ ] NO
AS OF MAY 4, 1998 THERE WERE OUTSTANDING 47,549,187 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE $.002 PER SHARE.
================================================================================
<PAGE> 2
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1998 (unaudited)
and December 31, 1997....................................................3
Condensed Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1998 and 1997...............................4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1998 and 1997...............................5
Notes to Condensed Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................15
Item 6. Exhibits and Reports on Form 8-K...................................15
SIGNATURES....................................................................16
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS [1]
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,446 $ 23,883
Accounts receivable, net of allowance for uncollectible accounts 313,557 215,983
Accounts receivable, other 33,872 41,608
Income taxes receivable 3,448 5,320
Prepaid expenses 7,463 7,664
Deferred income tax asset 1,582 1,174
----------- ------------
Total current assets 372,368 295,632
Property and equipment, net of accumulated depreciation 70,298 59,933
Restricted cash and deposits 511 500
Goodwill and intangibles, net of accumulated amortization 537,183 466,007
Deferred income tax asset 15,067 9,470
Other assets 15,125 16,161
----------- ------------
Total $ 1,010,552 $ 847,703
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 120,979 $ 77,180
Claims payable, including incurred but not reported claims 237,438 159,987
Accrued payroll and related liabilities 16,625 11,942
Other current liabilities 20,066 31,631
Accrued liability for professional liability claims, current portion 999 700
Long-term debt, current portion 9,409 12,379
----------- ------------
Total current liabilities 405,516 293,819
Long-term debt, net of current portion 336,551 322,873
Accrued liability for professional liability claims, net of current portion 3,996 2,800
Other long-term liabilities 50,569 48,051
----------- ------------
Total liabilities 796,632 667,543
Stockholders' equity:
Preferred stock, $.001 par value per share, 2,000,000 shares authorized,
no shares outstanding -- --
Common stock, $.002 par value, 98,000,000 shares authorized, 44,415,799
and 46,411,651 shares issued and outstanding at December 31, 1997
and March 31, 1998, respectively 93 89
Additional paid-in capital 347,913 304,990
Stock payable 539 573
Due from stockholder (427) (427)
Accumulated deficit (134,198) (125,065)
----------- ------------
Total stockholders' equity 213,920 180,160
----------- ------------
Total $ 1,010,552 $ 847,703
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
[1] These financial statements include the accounts of St. Joseph Medical
Corporation for all periods presented.
3
<PAGE> 4
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) [1]
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Managed care revenue $ 317,980 $ 228,652
Fee-for-service revenue, net of contractual deductions 50,223 47,829
Management services revenue 8,769 8,084
Other operating revenue 15,262 10,312
-------------- --------------
Operating revenue 392,234 294,877
Medical services expense 312,632 212,943
-------------- --------------
79,602 81,934
General and administrative expense 64,524 67,553
Depreciation and amortization expense 8,733 7,161
Merger, restructuring and other unusual charges 15,460 36,834
-------------- --------------
Loss from operations (9,115) (29,614)
Other income (expense):
Interest and other income 831 1,299
Interest expense (6,447) (4,430)
-------------- --------------
Total other expense (5,616) (3,131)
-------------- --------------
Loss before minority interests and income taxes (14,731) (32,745)
Minority interests' share in net loss -- 102
Income tax benefit 5,598 8,110
-------------- --------------
Net loss $ (9,133) $ (24,533)
============== ==============
Net loss per share - basic and dilutive $ (.20) $ (0.60)
============== ==============
Weighted average shares outstanding - basic 44,990,494 40,815,202
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
[1] These financial statements include the accounts of St. Joseph Medical
Corporation for all periods presented.
4
<PAGE> 5
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) [1]
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,133) $ (24,533)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization expense 8,733 7,161
Minority interests' share in net loss -- (102)
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts and notes receivable (88,272) (30,026)
Income taxes receivable/payable 1,873 --
Capitation deposit -- (5,538)
Deferred income taxes (5,593) (10,405)
Accounts payable and accrued expenses 22,849 16,080
Claims payable, including incurred but not reported claims 68,106 27,242
Accrued liability for professional liability claims (505) (770)
Accrued payroll and related liabilities 3,315 8,309
Prepaid expenses and other assets 2,318 (1,495)
Other liabilities (16,038) 294
-------------- --------------
Total adjustments (3,214) 10,750
-------------- --------------
Net cash used by operating activities (12,347) (13,783)
Cash flows from investing activities:
Purchase of property and equipment (6,909) (4,254)
Net payments to affiliate -- (26)
Net sale of marketable securities -- 24,950
Cash acquired from acquisitions 493 --
Other (11) --
-------------- --------------
Net cash provided (used) by investing activities (6,427) 20,670
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 2,500
Redemption of common stock -- (50)
Proceeds from exercise of stock options and warrants 754 1,195
Net borrowings under bank credit facilities 15,000 --
Proceeds from issuance of notes payable -- 8,176
Payments on long-term debt (8,422) (16,343)
Other 5 (13)
-------------- --------------
Net cash provided (used) by financing activities 7,337 (4,535)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (11,437) 2,352
Cash and cash equivalents, beginning of period 23,883 32,951
-------------- --------------
Cash and cash equivalents, end of period $ 12,446 $ 35,303
============== ==============
Supplemental cash flow information:
Cash paid for interest $ 2,938 $ 2,431
Cash paid for income taxes 46 --
Effects of acquisitions:
Fair value of assets acquired $ 86,426 $ --
Liabilities assumed (44,785) --
Common stock issued in connection with acquisitions (42,134) --
-------------- --------------
Net cash acquired from acquisitions $ (493) $ --
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
[1] These financial statements include the accounts of St. Joseph Medical
Corporation for all periods presented.
5
<PAGE> 6
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of FPA
Medical Management, Inc. ("FPA"), its wholly owned subsidiaries and certain
affiliated professional corporations ("Professional Corporations") over which
FPA has a controlling financial interest. All material intercompany transactions
and balances have been eliminated in consolidation.
In the opinion of management, the accompanying condensed consolidated
financial statements include all adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented of FPA, its subsidiaries and certain Professional Corporations
(collectively, the "Company"). The results of operations for any interim period
are not necessarily indicative of results for the full year. The condensed
consolidated financial statements and footnote disclosures should be read in
conjunction with the audited consolidated financial statements and related notes
thereto filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. BUSINESS COMBINATIONS
The Company completed the acquisition of Avanti Health Systems of Texas,
Inc. and its affiliated professional corporations ("Avanti") effective January
1, 1998. The purchase price consisted of $4.0 million cash and the issuance of
1,402,123 shares of FPA common stock valued at approximately $18.9 million.
Avanti managed 20 health care clinics in Houston and Dallas, Texas and employed
approximately 60 physicians who served approximately 50,000 enrollees. The
acquisition was accounted for under the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the acquired net
assets, which approximates $25.5 million, was recorded as goodwill and amortized
on a straight-line basis over 25 years.
The Company completed the acquisition of Physicians Quality Care, Ltd.
("PQC") and Associates in Managed Care, Ltd. ("AMC") effective January 1, 1998.
The purchase price consisted of the issuance of 299,165 shares of FPA common
stock valued at approximately $4.0 million, as well as future contingent
consideration of up to a maximum number of shares of FPA common stock equal to
$5.0 million. The contingent consideration will be payable based on achievement
of certain performance criteria. AMC was affiliated with approximately 420
primary care physicians who provided services to approximately 27,000 enrollees.
PQC provided physician practice management services in the Chicago area. The
acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the acquired net
assets, which approximates $8.6 million, was recorded as goodwill and amortized
on a straight-line basis over 25 years.
The Company completed the acquisition of Emergency Treatment Associates,
Inc. ("ETA") effective February 17, 1998. The purchase price consisted of $3.0
million cash and the issuance of 142,288 shares of FPA common stock valued at
approximately $2.8 million, as well as future contingent consideration of $2.9
million. The contingent consideration will be payable, in shares of FPA common
stock or cash, based on achievement of certain performance criteria. ETA
provided contract management services to six hospitals in two states through
approximately 40 affiliated emergency department physicians. The acquisition was
accounted for using the purchase method of accounting. The excess of the
purchase price over the estimated fair value of the acquired net assets, which
approximates $12.6 million, was recorded as goodwill and amortized on a
straight-line basis over 25 years.
The Company completed the acquisition of Orange Coast Managed Care
Services, Inc. ("OCMCS") and St. Joseph Medical Corporation ("SJMC") effective
March 20, 1998. The purchase price consisted of the issuance of up to 2,828,680
shares of FPA common stock valued at approximately $42.4 million. OCMCS provided
administrative management services to SJMC's IPA and medical group physicians in
Orange County, California. OCMCS and SJMC served approximately 120,000 managed
care enrollees through approximately 250 primary care physicians. The
acquisition of OCMCS was accounted for under the purchase method of accounting.
The merger with SJMC was accounted for as a pooling of interests. The excess of
the purchase price allocated to OCMCS over the estimated fair value of the
acquired OCMCS net assets, which approximates $18.1 million, was recorded as
goodwill and amortized on a straight-line basis over 25 years.
6
<PAGE> 7
The Company completed the acquisition of Meridian Medical Group, Inc.
("Meridian") and certain assets of the Meridian clinic sites effective April 1,
1998. The purchase price of Meridian consisted of the issuance of 1,051,770
shares of FPA common stock valued at approximately $16.8 million, $363,000 cash
and $3.6 million in notes payable, as well as future contingent consideration of
up to $5.0 million payable in cash, based on achievement of certain performance
criteria. The purchase price of the assets consisted of $2.5 million cash and up
to approximately $9.8 million in future capitation payment reductions. Meridian
was affiliated with approximately 65 physicians and provided services to
approximately 70,000 enrollees. The acquisition will be accounted for under the
purchase method of accounting. The excess of the purchase price over the
estimated fair value of the acquired net assets, which approximates $44.9
million, will be recorded as goodwill during the second quarter of 1998.
Amortization of the goodwill will be on a straight-line basis over 25 years.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. FPA is a national physician practice management company which
acquires, organizes and manages primary care physician practice networks and
provides contract management services to hospital-based emergency departments.
The Company provides primary and specialty care services to capitated managed
care enrollees and fee-for-service patients. As of March 31, 1998, the Company
was affiliated with approximately 7,900 primary care physicians (including
emergency department physicians), who provided services to approximately
1,416,800 enrollees of 61 health maintenance organizations ("HMOs") or other
prepaid health insurance plans (collectively, "Payors") in 29 states (including
the District of Columbia).
Through its subsidiary, Sterling Healthcare Group, Inc. ("Sterling"), the
Company provides contract management and support services primarily to emergency
departments. As of March 31, 1998, the Company provided physician practice
management services on a contract basis to 137 emergency departments, one
radiology department, three correctional health care facilities and three health
care clinics located in 25 states. The Company contracts with approximately
1,700 physicians who provide certain medical services to approximately 1.85
million patients annually.
FPA's relationships with its subsidiaries and affiliated Professional
Corporations, other providers of medical services and Payors (collectively, the
"FPA Network"), offer physicians the opportunity to participate more effectively
in managed care programs by organizing physician groups within geographic areas
to contract with Payors. FPA enhances physician practice management operations
by providing administrative functions necessary in a managed care environment.
The Company derives substantially all of its operating revenue from (i) the
payments made by Payors to the Professional Corporations and certain of the
Company's subsidiaries for managed care medical services, (ii) fee-for-service
revenues for the performance of medical services, (iii) fee-for-service revenues
from emergency department medical services, and (iv) medical management services
revenue. The Company has two types of Payor contracts: contracts for both
inpatient and outpatient services ("global capitation" contracts) and those
limited to covered primary and specialty medical care ("professional capitation"
contracts). Under global capitation contracts, the Company receives a fixed
monthly amount per enrollee for which the Company is financially responsible to
provide the enrollees with all covered necessary inpatient and outpatient care.
Under professional capitation contracts, the Company receives a fixed monthly
amount per enrollee for which the Company is financially responsible to provide
the enrollee with all necessary covered primary and specialty medical care.
Additionally, under professional capitation contracts, the Company is generally
a party to shared risk arrangements with Payors which generally reward the
Company for the efficient utilization of hospital inpatient services. Under
these shared risk arrangements, the Company shares any surplus or, in some
cases, deficit, of amounts pre-established by the Payor in relation to inpatient
expense.
RECENT DEVELOPMENTS. In March 1998, the Company assembled a new management
team when Stephen J. Dresnick, M.D., Herbert A. Wertheim, O.D., Douglas E.
Kerner and James A. Lebovitz were elected President and Chief Executive Officer,
Vice Chairman of the Board of Directors, Vice President, Treasurer and Acting
Chief Financial Officer, and Executive Vice President and General Counsel,
respectively. In May 1998, Jack Greenman was elected Executive Vice President.
Sol Lizerbram, D.O., and Kevin Ellis, D.O., will remain Chairman of the Board of
Directors and Executive Vice President - Chief Medical Officer, respectively. In
conjunction with these management changes, the Company is completing an
assessment of all regional operations and their respective contributions to the
Company's operational and financial performance. As a result of this
assessment, the Company expects that in the second quarter of 1998 it will
record a pre-tax charge for one-time non-recurring charges of up to
approximately $200 million, which are expected to consist of the following
items: approximately $125 million representing goodwill impairment; an
approximately $40 million write-down of shared risk and other receivables; and
approximately $35 million for additional severance payments, anticipated office
consolidation and other miscellaneous charges. Based upon the Company's current
assessment, management anticipates no additional restructuring charges in 1998.
The Company's growth during the past three years has been primarily the
result of acquisitions. This growth has enabled the Company to acquire critical
mass in multiple geographic locations, to enter into multi-state and national
Payor contracts and to increase operating revenue from $340.8 million in 1995 to
$1.2 billion in 1997. Consistent with the focus of the Company's new management
team, the Company's strategy is to promote internal growth by continuing to
improve and integrate existing and recently acquired operations, to
institutionalize medical management "best practices" throughout the Company's
medical groups and affiliated physicians, and to make selected, primarily
in-market, acquisitions. The future success of the Company is largely dependent
on the ability of the Company to retain enrollees and to increase the number of
enrollees in the FPA Network. The retention and increase in enrollment may come
from (i) the delivery of high-quality, cost-effective health care through
enhanced medical management systems, (ii) the development and enhancement of
infrastructure in order to expand internal growth, (iii) the addition of
physicians to the FPA Network who currently serve enrollees of Payors in the FPA
Network or of new Payors added to the FPA Network, (iv) increased membership in
plans of Payors with which the Professional Corporations or subsidiaries of the
Company currently have contracts and whose
8
<PAGE> 9
members are patients of physicians in the FPA Network or (v) through other
affiliation arrangements with Payors, physicians and other providers.
Listed below is a summary of enrollees, primary care physicians (including
emergency department physicians), and emergency department business contracts
(including seven radiology, urgent care and correctional facility contracts) by
state at March 31, 1998.
<TABLE>
<CAPTION>
EMERGENCY
PRIMARY CARE DEPARTMENT
ENROLLEES PHYSICIANS CONTRACTS
--------- ------------ ----------
<S> <C> <C> <C>
Alabama -- 130 7
Arizona 224,300 470 4
Arkansas -- 30 2
California 434,100 1,650 2
Delaware 13,600 100 --
Florida 130,700 450 13
Georgia 37,300 220 6
Hawaii -- 10 1
Illinois 28,200 130 10
Indiana -- 40 3
Kentucky 12,000 110 5
Louisiana 13,300 190 7
Maryland -- 90 4
Michigan -- 90 13
Mississippi -- 100 7
Missouri 8,300 170 13
Nevada 51,200 240 --
New Jersey 54,500 890 --
New York 153,000 780 2
North Carolina 32,100 220 11
Ohio 1,000 40 5
Oklahoma -- 10 1
Pennsylvania -- 360 1
South Carolina -- 160 3
Tennessee -- 90 8
Texas 194,400 1,070 13
Virginia 14,600 40 2
Washington, D.C. 14,200 10 --
West Virginia -- 10 1
--------- ------ -----
Total 1,416,800 7,900 144
========= ====== =====
</TABLE>
9
<PAGE> 10
RESULTS OF OPERATIONS
The following tables set forth for the three months ended March 31, 1997 and
1998 selected financial data (in thousands) and selected financial data
expressed as a percentage of operating revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 344,511 $ 47,723 $ 392,234 $ 258,870 $ 36,007 $ 294,877
Medical services
expense 276,195 36,437 312,632 186,435 26,508 212,943
General and
administrative
expense 57,944 6,580 64,524 61,475 6,078 67,553
Depreciation and
amortization 7,591 1,142 8,733 6,312 849 7,161
Merger,
restructuring
and other
unusual charges 15,460 -- 15,460 36,834 -- 36,834
---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
from operations (12,679) 3,564 (9,115) (32,186) 2,572 (29,614)
Other (income)
expense 5,575 41 5,616 3,109 22 3,131
---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before minority
interests and
income taxes (18,254) 3,523 (14,731) (35,295) 2,550 (32,745)
Minority interests'
shares in net loss -- -- -- 102 -- 102
Income tax
benefit (expense) 6,937 (1,339) 5,598 8,742 (632) 8,110
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ (11,317) $ 2,184 $ (9,133) $ (26,451) $ 1,918 $ (24,533)
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Medical services
expense 80.2% 76.3% 79.7% 72.0% 73.6% 72.2%
General and
administrative
expense 16.8% 13.8% 16.5% 23.7% 16.9% 22.9%
Depreciation and
amortization 2.2% 2.4% 2.2% 2.4% 2.3% 2.4%
Merger,
restructuring
and other
unusual charges 4.5% 0.0% 3.9% 14.2% 0.0% 12.5%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
from operations (3.7)% 7.5% (2.3)% (12.3)% 7.2% (10.0)%
Other (income)
expense 1.6% 0.1% 1.4% 1.2% 0.1% 1.1%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before minority
interests and
income taxes (5.3)% 7.4% (3.7)% (13.5)% 7.1% (11.1)%
Minority interests'
shares in net loss 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Income tax
benefit (expense) 2.1% (2.8)% 1.4% 3.4% (1.7)% 2.8%
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (3.2)% 4.6% (2.3)% (10.1)% 5.4% (8.3)%
========== ========== ========== ========== ========== ==========
</TABLE>
10
<PAGE> 11
MANAGED CARE BUSINESS
OPERATING REVENUE: The Company's managed care business operating revenue
increased to $344.5 million for the three months ended March 31, 1998 from
$258.9 million for the three months ended March 31, 1997. The revenue growth is
primarily attributable to enrollment growth from acquisitions, internal growth
and new Payor contracts and, to a lesser extent, the transition of existing
Payor contracts from fee-for service to capitated arrangements. Revenue growth
was adversely impacted by a decrease in administrative support payments
(primarily related to the acquisition of medical groups and related health care
centers from a predecessor to Foundation Health Systems, Inc. consummated in
late 1996) from $12.7 million in the quarter ended March 31, 1997 to $6.5
million in the quarter ended March 31, 1998. Global and professional capitation
contract revenue represented 44.5% and 47.8%, respectively, for the three months
ended March 31, 1998, and 28.2% and 60.1%, respectively, for the three months
ended March 31, 1997, of managed care business operating revenue. The Company
generates fee-for-service revenue from the performance of medical services
through the Professional Corporations and certain subsidiaries. These revenues
are presented net of contractual deductions and represented $50.2 million or
3.9% and $47.8 million or 6.9% for the three months ended March 31, 1998 and
1997, respectively, of managed care business operating revenue. The decrease in
fee-for-service revenue as a percentage of managed care business operating
revenue is attributable to continued enrollment growth under capitation
arrangements compared to fee-for-service business. Management services revenue
for the three months ended March 31, 1998 was $8.8 million or 2.5% of managed
care business operating revenue compared to $8.1 million or 3.1% of such
operating revenue for the three months ended March 31, 1997. The percentage
decrease in management services revenue can be attributed to the increase in
total managed care business operating revenue combined with the relative
stability of management services revenue.
MEDICAL SERVICES EXPENSE: Medical services expense for the three months
ended March 31, 1998 was $276.2 million or 80.2% of managed care business
operating revenue as compared to $186.4 million or 72.0% of such operating
revenue for the three months ended March 31, 1997. The percentage increase
resulted from reduced administrative support payments and increased medical
costs associated with membership under global capitation contracts. Pursuant to
these arrangements, the Company is responsible for all inpatient and outpatient
medical care (except in limited circumstances); the Company typically
experiences higher costs initially under these contracts than under professional
capitation contracts as it seeks to negotiate capitated contracts with hospitals
and outpatient medical specialists and control pharmacy costs. In areas,
particularly outside California, where the penetration of managed care is low,
the Company may experience delays in capitating these providers or higher than
anticipated rates for these services.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
including depreciation and amortization for the three months ended March 31,
1998 was $65.5 million or 19.0% of managed care business operating revenue as
compared to $67.8 million or 26.1% of such operating revenue for the comparable
period in 1997. The percentage decrease resulted from integration of acquired
companies, achievement of synergies and an increase in efficiencies.
MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES: During the three months
ended March 31, 1998, the Company recorded a charge to operating expenses of
$15.5 million for direct and other merger-related costs pertaining to the St.
Joseph Medical Corporation ("SJMC") merger transaction, which was accounted for
as a pooling of interests, and certain restructuring activities. Merger
transaction costs for the SJMC merger consist primarily of fees for investment
bankers, attorneys, accountants and other related charges. Restructuring costs
include severance of former executives, severance of SJMC employees terminated
due to consolidation of functions and exit costs associated with the SJMC
merger. A charge to operating expenses of $36.8 million was recorded during the
same period in 1997 for merger-related costs pertaining to the AHI Healthcare
Systems, Inc. ("AHI") merger transaction and related restructuring activities.
Merger transaction costs for the AHI merger consist primarily of fees for
investment bankers, attorneys, accountants and other related charges.
Restructuring costs included severance of terminated employees due to
consolidation of functions associated with the AHI merger.
LOSS FROM OPERATIONS: For the three months ended March 31, 1998, the
managed care business of the Company generated a loss from operations of $12.7
million as compared to a loss from operations of $32.2 million for the three
months ended March 31, 1997. The reduction in managed care business loss from
operations resulted primarily from the reduction in merger, restructuring and
other unusual charges, as well as reduced general and administrative expense.
This reduction in expenses was offset by a decrease in administrative support
payments received in connection with certain acquisitions and increased medical
services expense as previously discussed.
11
<PAGE> 12
EMERGENCY DEPARTMENT BUSINESS
OPERATING REVENUE: Emergency department business operating revenue consists
of (i) gross patient revenue, net of contractual deductions, (ii) hospital
subsidy payments, (iii) flat-rate hospital contract revenue and (iv) non-patient
generated revenue. Emergency department business operating revenue increased to
$47.7 million for the three months ended March 31, 1998 from $36.0 million for
the three months ended March 31, 1997. The revenue growth can be primarily
attributed to the increase in hospital emergency department contracts.
The Company's contractual arrangements with hospitals are primarily
fee-for-service contracts whereby hospitals generally agree, in exchange for the
Company's services, to authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by such professionals. Fee-for-service contracts may,
depending on the hospital's patient volume and payor composition, involve the
payment of a subsidy to the Company by the hospital. During the three months
ended March 31, 1998 and 1997, 76.8% and 83.2%, respectively, of the Company's
emergency department business operating revenue was earned on a fee-for-service
basis.
MEDICAL SERVICES EXPENSE: Medical services expense for the emergency
department business consists primarily of payments made to independent
contractor and employee physicians ("Physician Costs") and, to a lesser extent,
the costs of medical supplies, malpractice insurance and laboratory fees.
Medical services expense increased to $36.4 million for the three months ended
March 31, 1998 from $26.5 million for the three months ended March 31, 1997.
Physician Costs accounted for $34.4 million or 94.3% and $30.0 million or 94.3%
of emergency department business medical services expense for the three months
ended March 31, 1998 and 1997, respectively. The increase in medical services
expense is due primarily to the increase in the number of health care
professionals under contract, resulting from the increase in the number of the
Company's emergency department contracts, as well as negotiated increases in
fees paid to certain health care professionals. Medical services expense as a
percentage of emergency department business operating revenue was 76.3% for the
three months ended March 31, 1998 compared to 73.6% of such operating revenue
for the three months ended March 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
including depreciation and amortization was $7.7 million or 16.2% of emergency
department business operating revenue for the three months ended March 31, 1998
as compared to $6.9 million or 19.2% of such operating revenue for the
corresponding period of the prior year. The decrease in general and
administrative expense as a percentage of emergency department business
operating revenue is primarily attributable to internal growth without added
administrative infrastructure and an increase in efficiencies.
INCOME FROM OPERATIONS: For the three months ended March 31, 1998, the
emergency department business of the Company generated income from operations of
$3.6 million as compared to $2.6 million for the three months ended March 31,
1997. The increase in emergency department business income from operations for
the three months ended March 31, 1998, results primarily from the increase in
emergency department contracts, internal growth and reduction in operating
expenses as a percentage of emergency department business operating revenue
through increased efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to develop physician networks,
acquire physician practices and establish an infrastructure in new regions as
well as in acquired practices. Capitation arrangements positively impact cash
flow if the Company has accepted claims payment responsibility, because the
Company generally receives capitation revenue prior to the provision of, and
payment for, medical services. In those arrangements where the Payor retains
claims payment responsibility, the Payor generally withholds a substantial part
of the capitation revenue in order to pay the claims on behalf of the Company;
thus the Company does not receive the benefit of cash flow for the withheld
funds.
Shared risk arrangements negatively impact cash flow because settlements in
connection with these arrangements are typically not collected until
significantly after the end of the period in which they are accrued.
Fee-for-service revenues
12
<PAGE> 13
also negatively impact cash flow as payment for services rendered is generally
not collected until 90 to 120 days after the service is provided.
At March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $12.4 million and a working capital deficit (current liabilities
in excess of current assets) of $33.1 million compared to cash, cash equivalents
and marketable securities of $23.9 million and working capital surplus of $1.8
million at December 31, 1997.
The Company's decrease in cash and working capital was caused by negative
cash flow from operations as well as the effect of Payor contracts where the
Payor retains claims payments responsibility on behalf of the Company. Of the
Company's $97.6 million increase in accounts receivable, $71.0 million is
directly attributable to such Payor arrangements.
Government health care receivables are recorded based on estimates of
payments that are ultimately collectible. Since these amounts are subject to
government audit and negotiation, amounts ultimately collected may vary from
current estimates. Sterling is in the final stages of negotiating a compliance
plan with certain Medicare carriers regarding issues raised by the Health Care
Financing Administration related to claims for services rendered by Sterling's
independent contractor physicians. As a result of this process, Sterling's
reimbursement for Medicare billings has been significantly delayed. As of March
31, 1998, Sterling had accrued approximately $12.0 million related to Medicare
receivables. While the Company believes that it will favorably resolve the
issues raised by the Medicare carriers, there can be no assurance that Medicare
payments to the Company will not be further delayed as a result of these
inquiries.
During the three months ended March 31, 1998, non-operating sources of cash
include $15.0 million of advances, net of repayments, pursuant to the Credit
Agreement (as described below) and proceeds from the exercise of stock options
and warrants of approximately $754,000. Non-operating uses of cash include the
purchase of property and equipment for approximately $6.9 million and the
payment of approximately $8.4 million in long-term debt.
The Company has a $215 million three-year revolving line of credit ("Line
of Credit") and a $100 million four and one-quarter year term loan ("Term Loan")
with BankBoston, N.A., as administrative agent for the lenders thereto dated
June 30, 1997, as amended from time to time (collectively, the "Credit
Agreement"). Thirty million dollars of the proceeds of the Line of Credit is
used to support letter of credit obligations required of the Company pursuant to
certain Payor contracts. The remaining proceeds of the Line of Credit are
available for working capital and general corporate purposes. On May 14, 1998,
the Credit Agreement was amended to provide, among other matters : (i) that the
Applicable Margin for base rate loans will be 0.75% and for Eurodollar loans
will be 2.25%; (ii) for waiver until June 11, 1998 of any Default or Event of
Default under the Credit Agreement (as defined therein) prior to such amendment
as a result of the Company's failure to comply with the consolidated senior debt
covenant ratio as of March 31, 1998 and amendment of such ratio for the four
consecutive fiscal quarters ending March 31, 1998; and (iii) for waiver until
June 11, 1998 of any Default or Event of Default under the Credit Agreement
prior to such amendment as a result of the Company's failure to comply with the
limitation on Permitted Acquisitions during fiscal year 1998. The Credit
Agreement contains affirmative and negative covenants which include, among
others, requirements that the Company maintain certain financial ratios
(including minimum net worth, consolidated senior debt ratio, consolidated
leverage ratio and consolidated interest coverage ratio) and establishes certain
restrictions on investments, Permitted Acquisitions, additional indebtedness and
sales of assets. Failure by the Company to satisfy the covenants in the Credit
Agreement may result in a Default or Event of Default, which could have a
material adverse effect on the Company's financial condition. The obligations of
the Company under the Credit Agreement are collateralized by the assets of the
Company and the capital stock and assets of its subsidiaries and the
Professional Corporations. At March 31, 1998, the Company had $142.8 million
outstanding on the Line of Credit and $99.6 million outstanding under the Term
Loan. At May 15, 1998, the Company had $185.0 million outstanding on the Line of
Credit and $99.6 million outstanding under the Term Loan. As of May 15, 1998, no
additional borrowing capacity exists under the Credit Agreement as currently
structured.
The Company relies on its subsidiaries to make dividend payments, loans or
other transfers of cash to the Company and on revenues received pursuant to
administrative services agreements with the Professional Corporations in order
to pay its obligations. Under the Knox-Keene Health Care Service Plan Act of
1975, the Company's California subsidiary must meet certain minimum tangible net
equity requirements which may limit the ability of such subsidiary to pay the
Company's obligations. To the extent the subsidiaries are unable to make cash
distributions to the Company or the costs to manage the Professional
Corporations are greater than the management fees received by the Company, the
Company may not have sufficient cash to pay its obligations.
The Company believes that its cash on hand and anticipated cash flows from
operations will be sufficient to meet the Company's operating capital needs
through the second quarter of 1998. The Company is in the process of identifying
opportunities to improve cash flow in all regions of the Company and has
instituted a program to reduce general and
13
<PAGE> 14
administrative expenses including a work-force reduction, the closing of its
Long Beach, California facility, consolidation of its credentialing department
to Miami, Florida and the pursuit of other office consolidations and closures.
In addition, the Company anticipates that the write-down of goodwill is expected
to result in reduced amortization charges of approximately $5 million on an
annualized basis. The Company also intends to seek both short-term and long-term
financing in order to meet its cash requirements. There can be no assurance that
the Company will be able to obtain such financing or that it will be able to
issue debt or equity-related securities on terms satisfactory to it. To the
extent that additional financing is not available, the Company will consider
additional restructuring of its operations and will delay certain potential
acquisitions or geographic expansion.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed care industry is labor intensive and its profit margin is low;
hence, it is especially sensitive to inflation. Increases in medical expenses or
contracted medical rates without corresponding increases in capitated or
fee-for-service payments from Payors could have a material adverse effect on the
Company's results of operations and financial condition.
Various federal and state legislature initiatives regarding the health care
industry have been proposed during recent legislative sessions, and health care
reform and similar issues continue to be in the forefront of social and
political discussion. If health care reform or similar legislation is enacted,
such legislation could impact the Company. Management cannot at this time
predict whether any such initiative will be enacted and, if enacted, the impact
on the financial condition or results of operations of the Company.
The Company's ability to expand its business is dependent, in part, on its
ability to secure cost-effective contracts with providers and favorable
capitation rates from Payors. Achieving these objectives is becoming
increasingly difficult due to the competitive environment. In addition, the
Company's profitability is dependent, in part, on its ability to maintain
effective control over health care costs while providing members with quality
care. Factors such as health care reform, integration of acquired companies,
regulatory changes, utilization, new technologies, hospital and pharmaceutical
costs, major epidemics and numerous other external influences may affect the
Company's operating results. Accordingly, past financial performance is not
necessarily a reliable indicator of future performance, and investors should not
use historical financial results to anticipate results or future period trends.
The Company's subsidiaries and Professional Corporations record reserves
to account for their estimated ultimate liability for medical expenses with
respect to reported and unreported claims incurred ("IBNR"), which are included
in the Company's claims payable. These reserves are estimates of future payments
based on various assumptions. Establishment of appropriate reserves is an
inherently uncertain process, and there can be no certainty that currently
established reserves will prove adequate in light of subsequent actual
experience, which could result in reserves being too high or too low. The
accuracy of these estimates may be affected by external forces such as changes
in the rate of inflation, the regulatory environment, medical costs and other
factors. As the Company's capitation managed care revenue increases as a
percentage of total managed care revenue, claims payable including IBNR will
increase. The increase in claims payable, including incurred but not reported,
from approximately $160.0 million at December 31, 1997 to approximately $237.4
million at March 31, 1998, resulted primarily from the increase in the number of
members served by the FPA Network and the increase in membership served pursuant
to global capitation contracts.
Certain statements contained in this Quarterly Report on Form 10-Q
constitute forward-looking statements contemplated under the Private Securities
Litigation Reform Act of 1995. Although FPA Medical Management, Inc. believes
that its expectations are based on reasonable assumptions within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from their expectations. Factors that
could cause actual results to differ from expectations include the difficulty in
controlling health care costs and integrating new operations, the ability of the
Company to secure financing for operations and acquisitions on reasonable terms,
the ability of the Company to realize the anticipated general and administrative
expense savings and overhead reductions, the ability of the Company to return
the Company's operations to profitability, the level and nature of the
restructuring and other one-time charges, the difficulty in estimating possible
costs related to exiting certain markets and consolidating and closing certain
operations, and the possible negative effects of prospective health care reform.
For other important factors that may cause actual results to differ materially
from expectations and underlying assumptions, see reports by FPA Medical
Management, Inc. filed with the Securities and Exchange Commission.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
NONE
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
10.14 Consulting and Settlement Agreement between the Company and Howard
Hassman dated as of April 1, 1998.
(b) Reports on Form 8-K: The Company filed the following Current Reports on Form
8-K since December 31, 1997:
NONE
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
(Registrant)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN J. DRESNICK President, Chief Executive Officer and Director May 15, 1998
- ------------------------------------- (Principal Executive officer)
Stephen J. Dresnick
/s/ DOUGLAS E. KERNER Vice President, Treasurer and Acting Chief May 15, 1998
- ------------------------------------- Financial Officer (Principal Financial Officer)
Douglas E. Kerner
</TABLE>
16
<PAGE> 1
EXHIBIT 10.14
CONSULTING AND SETTLEMENT AGREEMENT
CONSULTING AND SETTLEMENT AGREEMENT (this "Agreement"), dated as
of April 1, 1998 (the "Effective Date"), between FPA Medical Management, Inc., a
Delaware corporation (the "Company") and Howard Hassman (the "Executive").
WHEREAS, the Company and the Executive have previously entered
into that certain Employment Agreement, dated as of October 1, 1996 (the
"Employment Agreement");
WHEREAS, it is mutually in the best interests of the Executive
and the Company to modify and settle certain provisions of the Employment
Agreement and to provide for its earlier termination;
WHEREAS, the Company desires to continue to benefit from the
experience and ability of the Executive in the capacity of a consultant to the
Company upon termination of his employment relationship with the Company and
the Executive is willing to commit himself to serve in the capacity of a
consultant to the Company; and
WHEREAS, the parties desire to enter into this Agreement setting
forth the terms and conditions related to the termination of the Executive's
employment relationship with the Company and the terms and conditions of the
retention of the Executive as a consultant to the Company.
NOW, THEREFORE, in order to effect the foregoing, in
consideration of the premises and the respective covenants and agreements of the
parties herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows (capitalized terms used but not defined herein having
the meanings ascribed to such terms in the Employment Agreement):
1. Termination of Employment.
(a) Effective as of the Effective Date, the Executive
hereby resigns his position as Executive Vice President - Corporate Development
and hereby resigns as an officer and director, as applicable, of each of the
Company's direct or indirect subsidiaries and affiliated professional
corporations. Executive
<PAGE> 2
hereby agrees to resign as a director of the Company as of the next annual
meeting of the Company's stockholders. Except as provided in paragraph (b)
below, effective as of the Effective Date, the Employment Agreement shall be
terminated and the Company and the Executive shall have no further rights or
obligations under the Employment Agreement. The Executive shall execute and
deliver such further instruments and do such further acts as may be reasonably
necessary to effect the resignation of his positions pursuant to this Section
1(a).
(b) Notwithstanding paragraph (a) above and other
provisions of this Agreement, except as modified herein, the provisions of
Sections 4(a),4(d), 4(e), 4(f), 4(g), 4(h), 4(i), 4(j), 5 and 6 of the
Employment Agreement shall survive the termination of the Employment Agreement
(the "Surviving Provisions").
(c) The Company acknowledges and agrees that, effective as
of the Effective Date, the Executive's employment shall be deemed to have been
terminated for other than Cause and the Executive shall be entitled to receive
the Severance Benefits consistent with the terms of Section 4(a)(ii) of the
Employment Agreement (including but not limited to the vesting of all stock
options then held by the Executive). The Executive shall be entitled to exercise
all of his employee stock options during the seventeen (17) months following the
Effective Date during which the Executive serves as a consultant to the Company
pursuant to Section 2 below and for one (1) month thereafter, consistent with
the terms of the Company's stock option plans.
(d) The Company and the Executive acknowledge and agree
that the aggregate amount to be paid to the Executive in equal payments over the
36 month period pursuant to Section 4(a)(ii)(A) of the Employment Agreement
shall be $2,025,000. The Company and the Executive acknowledge and agree that
the benefit due to the Executive pursuant to Section 4(a)(ii)(B) relating to
Section 3(c)(v) of the Employment Agreement shall be paid in equal monthly
payments. The Company and the Executive acknowledge and agree that the aggregate
amount to be paid to the Executive pursuant to Section 4(a)(ii)(C) of the
Employment Agreement shall be $127,212, payable within twenty (20) days of the
date hereof.
(e) Notwithstanding Section 1(c) above, in the event of a
Change of Control within six (6) months following the Effective Date, the
Executive shall be entitled to receive, in lieu of the payments and benefits
described in Sections 1(c) and 1(d), the Severance Package described in and
payable pursuant to Section 4(a)(iii) of the Employment Agreement and shall have
the right to receive the Gross-
2
<PAGE> 3
Up Payments described in Section 4(a)(iii)(E). The Executive and the Company
acknowledge and agree that the amount payable to the Executive as part of the
Severance Package shall be determined utilizing the amounts set forth in
paragraph (d) above.
(f) As compensation for the services rendered during the
course of the Consulting Period (as defined below) and in consideration of the
Executive's agreement not to compete with the Company pursuant to Section 3
below, the Company shall pay the Executive $1,250,000, payable as follows: (i)
within 20 days of the date hereof, the Company shall pay to the Executive
$250,000 and (ii) on the date which is the six month anniversary of the
Effective Date, the Company shall pay to the Executive $1,000,000, in each case,
by wire transfer in accordance with instructions to be provided to the Company
by the Executive in writing.
(g) The Company hereby forgives Executive's indebtedness
to the Company reflected by the Note dated February 18, 1998 in the amount of
$59,000.
(h) The Company shall continue to provide malpractice
insurance coverage to Executive on its current policy for covered medical
malpractice claims occurring between July 15, 1984 and April 1, 1998. If the
Company does not renew such policy with similar coverage, an unlimited reporting
period endorsement will be purchased to cover this same period.
2. Retention as a Consultant.
(a) The provisions of this Section 2 shall commence upon
the Effective Date and shall expire seventeen (17) months thereafter (the
"Consulting Period").
(b) During the Consulting Period, in consideration of
payments to be made pursuant to Sections 1(c) and 1(f) above and the mutual
covenants contained herein, the Executive shall render such consulting services
to the Company and its affiliates as the Executive and the Company agree upon
from time to time (including, without limitation, attendance at Company meetings
not less than once every six (6) weeks); provided, however, that, subject to
Section 3 below, the obligation of the Executive to render such services shall
not preclude his undertaking full-time employment for another employer.
3
<PAGE> 4
(c) The Executive shall perform his duties hereunder at
such locations as are acceptable to him and the Company and consistent with the
nature of the services or by telephone consultation.
(d) The Company shall reimburse the Executive for
reasonable business expenses incurred in the performance of the Executive's
duties hereunder; provided, that such expenses shall be incurred and accounted
for in accordance with the policies and procedures established by the Company
from time to time for its senior executives.
3. Non-Competition.
In consideration of the payments to be made to the Executive
pursuant to Sections 1(c) and 1(f) above and the mutual covenants contained
herein, the Executive agrees not to compete with the Company pursuant to the
terms set forth in Section 4(e) of the Employment Agreement; provided that the
"Non-Competition Period" set forth in Section 4(e) of the Employment Agreement
for purposes of this Agreement shall begin on the Effective Date and continue
for a period of eighteen (18) months thereafter.
4. Releases.
(a) As a material inducement to enter into this Agreement,
the Executive hereby knowingly and voluntarily, fully and finally releases,
acquits and forever discharges as of the Effective Date, the Company and its
affiliates, and their past and present officers, directors, shareholders,
partners, trustees, beneficiaries, managers, employees, attorneys, agents,
successors or assigns (the "Company Released Parties") from any and all claims,
charges, complaints, liens, demands, causes of action, obligations, damages and
liabilities, known or unknown, suspected or unsuspected, that he had, has, or
may claim to have against the Company Released Parties arising out of or
relating in any way to the Executive's relationship with the Company as an
employee, officer, director, or representative or the termination thereof, or
the termination of the Employment Agreement (including without limitation the
federal Age Discrimination in Employment Act or equivalent state law).
Notwithstanding the generality of the foregoing, nothing contained herein shall
release the Company or in any way impair the Executive's rights to the benefits
of insurance coverage or reimbursement or indemnification from the Company
arising from or relating in any way to the Executive's service as an employee,
officer or director as provided by law or under the Company's bylaws, or under
any applicable
4
<PAGE> 5
indemnification agreement or insurance policy to which the Company is a party,
including, but not limited to, the Executive's rights to reimbursement, coverage
or indemnification in connection with any current or future litigation matter
arising from or relating in any way to the Executive's services as an employee,
officer, director or representative of the Company; nor shall the foregoing
release the Company from any claim relating to the breach by the Company of its
obligations set forth herein, or set forth in the Surviving Provisions, or the
right to receive any payments or benefits to which the Executive is entitled
pursuant to any Company employee benefit plan. Notwithstanding the generality of
the foregoing, nothing in this Agreement shall be construed to effect a release
of any right or claim by the Executive in connection with his rights as a
stockholder of the Company.
(b) As a material inducement to enter into this Agreement,
the Company, likewise hereby knowingly and voluntarily, fully and finally
releases, acquits, and forever discharges as of the Effective Date, the
Executive and his agents, employees, successors, heirs, beneficiaries or assigns
(the "Executive Released Parties") from any and all claims, charges, complaints,
liens, demands, causes of action, obligations, damages and liabilities, known or
unknown, suspected or unsuspected, that it had, has, or may claim to have
against the Executive Released Parties arising out of or relating in any way to
the Executive's relationship with the Company as an employee, officer, director
or representative, whether or not previously asserted before any state or
federal court or before any state, federal or regulatory agency or governmental
entity. Notwithstanding the generality of the foregoing, nothing contained
herein shall release the Executive from any claim relating to the breach by the
Executive of any confidentiality agreements with the Company or any of its
affiliates or the obligations set forth herein, or set forth in the Surviving
Provisions.
(c) Each of the Company and the Executive acknowledges
that such party has been advised by legal counsel regarding, is familiar with
and expressly waives all rights afforded by Section 1542 of the Civil Code of
the State of California ("Section 1542"), or any statute of similar effect in
any other jurisdiction in which any action might be brought, with respect to the
claims described in paragraphs (a) and (b) of this Section 4. Section 1542
states as follows:
A GENERAL RELEASE DOES NOT EXTEND
TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE
5
<PAGE> 6
RELEASE, WHICH IF KNOWN BY HIM MUST
HAVE MATERIALLY AFFECTED HIS SET-
TLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Company and the Executive
understands and agrees that this Agreement is intended to include all claims, if
any, described in paragraphs (a) (in the case of the Executive) and (b) (in the
case of the Company) above, which either party may have and which neither party
now knows or suspects to exist in such party's favor against the Company
Released Parties (in the case of the Executive) or the Executive Released
Parties (in the case of the Company) and that this Agreement extinguishes those
claims.
5. Right to Revoke.
The Executive acknowledges that the Company has advised him to
consult with an attorney of his choosing prior to signing this Agreement and
that he has been given the opportunity, if he so desired, to consider the
provisions of this Agreement for at least twenty-one (21) days. The Executive
further acknowledges that he has been advised by the Company that he has the
right to revoke this Agreement for a period of seven (7) days after the
execution of this Agreement and that this Agreement shall not become effective
or enforceable until such seven (7) day revocation period has expired. The
Executive acknowledges and agrees that, if he wishes to revoke this Agreement,
he must do so in writing, signed by the Executive and received by the Company at
its headquarters no later than 5:00 p.m. Pacific Standard Time on the seventh
(7th) day after the Effective Date. The Executive acknowledges and agrees that,
in the event that he revokes this Agreement, he shall have no right to receive
any payment hereunder. The Executive understands and agrees that the Company is
under no obligation to offer such payment and that he is under no obligation to
consent to the release set forth in Section 4 of this Agreement. The Executive
represents that he has read this Agreement and understands its terms and that he
enters into this Agreement freely, voluntarily, and without coercion.
6. Nondisparagement and Litigation Support.
(a) Neither the Company on the one hand, nor the Executive
on the other hand, will make any derogatory or negative statements about the
other party that may adversely affect the current or potential business
relationships of the other. The Company agrees that the Executive will have the
right to reasonably
6
<PAGE> 7
approve the content of any press release containing specific reference to the
Executive.
(b) The Executive agrees to make himself and his records
available to the Company for consultation, testimony and related matters in
connection with any claim, action, proceeding or investigation instituted by or
against the Company before any court or governmental authority, in any manner as
may be reasonably requested by the Company.
7. Successor; Binding Agreement.
(a) The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to the Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein before defined and any successor to its business and/or assets and each
entity that, directly or indirectly, becomes a parent corporation of the
Company.
(b) This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable or benefits would still be provided to him and/or
his family hereunder if he had continued to live, all such amounts and benefits,
unless otherwise provided herein, shall be paid or provided in accordance with
the terms of this Agreement to the Executive's devisees, legatees, or other
designees or, if there be no such designee, to the Executive's estate.
8. Notice.
For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certificated or registered mail, return
receipt requested, postage prepaid, addressed as follows:
7
<PAGE> 8
If to the Executive:
Howard Hassman
16326 Via Cazadero
Rancho Santa Fe, CA 92067
If to the Company:
FPA Medical Management, Inc.
3636 Nobel Drive
San Diego, CA 92122
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective in accordance herewith, only upon receipt.
9. Withholding.
All amounts payable hereunder shall be subject to such
withholding taxes as may be required by law.
10. Modification of Agreement; Governing Law.
No provisions of this Agreement may be modified, waived or dis-
charged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officer of the Company as may be
specifically designated by the board of directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto or, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without regard to its conflicts of law principles.
8
<PAGE> 9
11. Validity.
The validity or enforceability of any provision or provisions of
this Agreement shall not be affected by the invalidity or unenforceability of
any other provision of this Agreement, and such valid and enforceable provisions
shall remain in full force and effect.
12. Counterparts.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
13. Entire Agreement.
This Agreement, including all schedules and exhibits, together
with the Employment Agreement as amended hereby upon its execution and delivery,
set forth the entire agreement of the parties hereto in respect of the subject
matter contained herein and supersedes all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto
which are related to the subject matter of the Employment Agreement or the
termination thereof.
9
<PAGE> 10
IN WITNESS WHEREOF, each of the parties has executed this
Agreement as of the date and year first written above.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ JAMES A. LEBOVITZ
----------------------------------------
Name: James A. Lebovitz
Title: Executive Vice President
/s/ HOWARD HASSMAN
--------------------------------------------
HOWARD HASSMAN
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,446
<SECURITIES> 0
<RECEIVABLES> 347,429
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 372,368
<PP&E> 70,298
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,010,552
<CURRENT-LIABILITIES> 405,516
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 213,920
<SALES> 0
<TOTAL-REVENUES> 392,234
<CGS> 0
<TOTAL-COSTS> 312,632
<OTHER-EXPENSES> 88,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,616
<INCOME-PRETAX> (14,731)
<INCOME-TAX> (5,598)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,133)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0.00
</TABLE>
